How credit card interest works: APR, daily rate and grace period

How is credit card interest calculated?

The issuer turns your APR into a daily rate, applies it to the balance for each day of the cycle, and adds up the result on your statement.

APR is an annualized interest rate, and a card can have a different one for purchases, cash advances and balance transfers ^[3]. To get the daily periodic rate, the issuer divides the APR by 360 or 365, depending on the card ^[2]. The CFPB's model card contract uses 365 ^[3].

The common method is the average daily balance. The issuer takes each day's balance (adding new charges and subtracting payments and credits), adds those up, and divides by the number of days in the cycle. Then it multiplies that average by the daily rate and by the number of days ^[3]. If the previous day's interest goes into each daily balance, interest compounds daily ^[3]. Your cardholder agreement says which method your card uses.

When does a credit card start charging interest?

On purchases, usually only when you don't pay the full statement balance by the due date. Cash advances usually charge interest from day one.

The grace period is the time between the end of a billing cycle and the payment due date. The CFPB says issuers don't have to offer one, though most cards do on purchases ^[4]. When a card has one, Regulation Z requires the issuer to mail or deliver the statement at least 21 days before the grace period ends ^[5].

Miss paying the full balance and the grace period is gone. You're charged interest on the unpaid part, and new purchases start charging interest the day you make them ^[4]. In the CFPB's model contract, you get the grace period back only after paying the full balance on time for the number of cycles your agreement states ^[3]. Cash advances and convenience checks from your issuer generally charge interest from the transaction date ^[4].

• Regulation Z bars issuers from charging interest on balances from days in billing cycles before the most recent one, the practice once called double-cycle billing ^[6].
• If you pay part of a balance that has a grace period before it ends, the issuer can't charge interest on the part you paid ^[6].
• When a card has several APRs, your statement has to show each one and how much of the balance falls under it ^[10].

What is the average credit card interest rate?

22.36% on accounts that paid interest in August 2026, per the Federal Reserve. The average across all accounts was 21.19%.

The two columns measure different things. "All accounts" is the stated APR averaged across every card account at the reporting banks. "Accounts assessed interest" is total finance charges divided by the average daily balances they were charged on, counting only accounts that paid interest ^[1]. If you carry a balance, the second column is closer to what people like you pay.

When can a card issuer raise your APR or charge a penalty rate?

A penalty rate can reach balances you already owe only after a payment is more than 60 days late. Six on-time payments in a row bring the old rate back.

Regulation Z bans rate increases on credit card accounts except in listed cases ^[7]. One is a payment the issuer hasn't received within 60 days of its due date. After that kind of increase, if you make six consecutive minimum payments on time, the issuer has to cut the rate back for transactions from before the increase ^[7].

• For new purchases, the issuer generally has to give 45 days' notice before raising the rate ^[8].
• In the first year after the account opens, the issuer generally can't raise the rate on new transactions ^[8]. The 60-day exception still applies in that year ^[7].
• A variable rate can rise when its index, such as the prime rate, goes up ^[8].
• A promotional rate can end when its stated period runs out, and that period has to be at least six months ^[8].
• Each statement has to show the late fee and any penalty rate a late payment could trigger ^[9].

What a missed payment costs beyond the rate is covered in missed credit card payments.

How do you avoid paying credit card interest?

Pay the full statement balance by the due date every month, and skip cash advances. Paying only the minimum keeps interest running on the rest.

If you can't clear the balance, paying more than the minimum helps twice. The interest shrinks with the balance, and Regulation Z sends the amount above the minimum to your highest-APR balance first ^[10]. What paying only the minimum costs runs the numbers. Moving the debt to a lower rate is the other route, covered in how balance transfers work.